I acknowledge the arguments that Google’s bill of materials on
smartphones, perhaps in the hundreds-of-dollars range, would be
too big a subsidy to absorb — at this present time. That cost is
increasingly decreasing. If Google is betting on a future that is
mobile-centric, this is a bet that’s worth taking.

If we’re talking free as in “no-contract free”, keep in mind that most estimates of Google’s search revenue per Android user are in the range of $6-10 per year. So if you figure people keep their phones for two or three years, these giveaway phones would have to cost — what? — maybe $10 or $20 in order for Google to turn a profit?